]]>I’m not really sure what’s going in the enterprise software market right now.

Over the last 18 months, I’ve seen expansion-stage valuations steadily (and, on occasion, precipitously) rise.I keep reading articles and statistics to the contrary, but then again, perhaps I’m just experiencing the misfortune of chasing deals that are overpriced.

Or maybe I’m not. My hypothesis for steep enterprise valuations is shared by many: Too much money in the market is chasing too few great deals. Add to that a layer of consumer-oriented investment funds (perhaps feeling neutered by the recent IPO performances of Groupon, Facebook, Zynga, etc.) throwing their weight around in the enterprise market, and we have a perfect storm.

As a result, that frothy market has noticeably impacted some of the expansion-stage management teams that are (or have been) raising money.

My sense is that VCs with massive funds to deploy have emboldened management teams into thinking that they can command any price for their company, and that it’s only a matter of time before they have their own billion dollar IPO.

In the last six to nine months, for instance, a number of entrepreneurs have been disclosing their valuation expectations to me at the onset of a conversation. Part of me thinks that this information is helpful because it allows me to manage my time effectively. If a CEO of SaaS business with $2mm in revenues and $3mm in bookings tells me that they are raising at a $50 million pre-money valuation, I know to not waste my time.

That said, I can’t find any positive benefit of expansion-stage CES acting in this manner, which is why I implore all entrepreneurs to let the market set the price. As my colleague Ricky Pelletier wrote earlier this week, price alone is not a way to choose a VC partner.

The good news is that I have started to sense a slight market correction over the last two months, as several deals that we walked away from over the summer have re-engaged with more humble valuation expectations. Unfortunately for those expansion-stage CEOs, it never looks good when entrepreneurs come back to VCs whom they previously called “cheap” after those VCs were unwilling to deliver the round the entrepreneurs set out to raise.

This is such an easily avoidable issue, which is why I’m suggesting that you to find a venture partner you like first, let them run their process, and propose a deal that they think makes sense. It’s better to get your hands on a term sheet the first time around and reject it, than go back four months later with your hat in your hand!

I’m not sure if i can actually call this the start of a market correction as we at OpenView are still regularly seeing deals that are getting done at valuations far from what we can justify paying. And while these prices can’t last forever, they’ve already lasted far longer than I expected.

So, the question is: What will be the catalyst that brings everyone back to reality?

]]>I and a number of my colleagues have spent time writing posts on what we look for in an investment opportunity. It’s probably the most frequent question we get from entrepreneurs and expansion-stage company management teams. Since I’ve already opined on how VCs assess investment opportunities in broad strokes, I thought I’d take the time to explain how we evaluate one of the more nuanced, but critically important aspects of an investment opportunity: market size.

Typically, I’ll start with a rough top-down analysis to get a quick sense of the scale of the opportunity. This can generally be gleaned from research reports from firms such as Gartner, Frost & Sullivan, Forrester, Ibis World, etc. While the accuracy of theses “market sizes” can vary wildly, they help give context/act as a sanity check for the most important part of our work, which is the “bottom-up” analysis.

Getting to an approximate “bottom-up” analysis can be done relatively simply if you have the appropriate facts or are willing to make the appropriate assumptions.

As an example, let’s say I was trying to figure out the overall market size for an imaginary company, LearnStuff.com, which sells software to higher education institutions for use by their students. An incredibly simple (but probably not sufficiently accurate) way to do this would be to find a figure for the total number of higher education institutions in the US and multiply that number by an assumed average sale price per institution. That figure is approximately 6,700, of which approximately 4,500 are degree granting. We might assume that only degree granting institutions have a need for LearnStuff.com’s solution so we’ll stick with a market of 4,500 institutions. If I then assume that, on average, LearnStuff.Com is charging $100k per institution per year, we would arrive at a market size of $450 million. Though this is helpful in understanding the market size in a “quick and dirty” fashion, it’s probably not completely accurate.

A more sophisticated approach to understanding the total market would be to evaluate the market based on LearnStuff.com’s different revenue streams (software and services/support) quantified by the number of FTE (full-time enrollments) at the underlying institutions (since most consumers of enterprise software make purchase decisions based on number of “seats” as opposed to writing checks for nebulously described services for a non-specific number of people).

If we first assume that LearnStuff.com charges $30 per FTE plus a 15% support charge, we get a blended total cost per FTE of $34.50. If we then multiply that number by the 18 million students we assume attend the 4,500 institutions in LearnStuff.com’s core market, we arrive at a total market size of roughly $621 million.

I then might try to figure out the actual addressable market and would make assumptions about the revenue dollars that LearnStuff.com could compete for (taking into account whether this was a highly competitive market), and what % they would win in competitive situations. For example, I might have reason to believe that only 40% of the market, or $249 million of revenue, was actually up for grabs to a new market entrant. Based on the information that the LearnStuff.com management team has provided to me during diligence, I know that they win 1 out of 3 contracts they bid on, so I feel comfortable making the assumption that they can take 33.3%, or $83 million of the available revenue in the market.

You can see how what appeared to be a $621 million market was quickly reduced to an $83 million opportunity in the eyes of an investor. I’m more inclined to get excited about a company whose initial investor presentation has put serious thought into their target market segment and actual addressable market, even if it’s sub $100 million. Nothing will draw more scrutiny from an investor than the magic $1 billion addressable market size!

Dan Primack seems to have a knack for asking seemingly simple but poignant and pointed questions that stir one to respond (hence my first blog post in quite some time).

Today in Dan’s Term Sheet email, he wondered who venture investors’ perceive to be their primary customer. His question was in the context of Peter Thiel and the venture firm Andreesen Horowitz selling a significant amount of stock in portfolio companies that are now publicly traded. Dan’s hunch is that LPs are VC’s primary customer. He is right. My response to Dan is below:

Dan,

You’re 100% correct. As investors of (primarily) other people’s money, our LPs are our #1 priority. They are the reason we are in business and we have not only given them our word, but are also legally bound as fiduciaries to be stewards of their capital and grow it as efficiently and ethically as we think possible given our firm’s investment strategy. That said, at OpenView we deeply believe that we can drive the greatest returns for our investors by focusing almost all of our activities around helping our portfolio companies grow by providing them as much operational support (and capital) as we can muster/they need. For us, making money for our LPs and doing what’s best for a portfolio company are directly correlated. The cases that you describe with Groupon and Facebook are atypical in that Monsieurs Thiel and Andreesen invested in companies that are (or were to become) multi-billion dollar publicly traded companies.

Generally speaking, these investors should be perceived as having already done everything they could do to make their portfolio companies successful as, by all measures, Groupon and Facebook are wildly successful venture-backed businesses. Those are six-sigma outliers in the venture business (sad but true), and for them not to realize any of their investments for their LPs would have been imprudent. I understand that most of the shares Mr. Thiel sold recently were held by him personally, and I believe that he has every right to realize his own personal investments. However, Mr. Thiel is now a director of a publicly-traded company and is thus a steward of many other people’s capital. As such, he likely did not act in all of the public equity holders’ interests by selling his stake. That was his prerogative and I don’t begrudge him at all. He should probably step down from the board — he has served Facebook and Facebook has served him quite well, but their interests are no longer as aligned as they once were. That’s just my two cents.

What spurred me to action to write this note however, is that a certain sub-segment of our industry portray themselves as maverick do-gooders who have no need for money, but rather their greatest goal is to change the world by investing in transformative businesses. Now, there’s nothing wrong with that sentiment if you’re investing your own personal capital. Heck, I wish there were more wealthy individuals in the world who still had such idealistic and lofty goals. Unfortunately though, as institutional investors we are stewards of (mostly) other people’s capital and our #1 priority is to provide exceptional returns to our limited partners. Full stop. Any institutional investor that advertises themselves as something different is full of it and their LPs should take note.

]]>http://blog.openviewpartners.com/a-response-to-dan-primack-yes-lps-are-a-vcs-number-1-customer/feed/0Sorry, But Your Expansion Stage Software Business Probably Ain't Worth $100 millionhttp://blog.openviewpartners.com/sorry-but-your-expansion-stage-software-business-probably-aint-worth-100-million/?utm_source=rss&utm_medium=rss&utm_campaign=sorry-but-your-expansion-stage-software-business-probably-aint-worth-100-million
http://blog.openviewpartners.com/sorry-but-your-expansion-stage-software-business-probably-aint-worth-100-million/#commentsSat, 18 Feb 2012 08:00:07 +0000http://blog.openviewpartners.com/?p=16849I continue to be amazed by the number of entrepreneurs that can show a relative lack of sophistication or business acumen in a conversation until the topic of their business valuation comes up. Once it gets to that point, they can rattle off every Andreesen Horowitz deal and how “X” business was acquired at 10x […]

I continue to be amazed by the number of entrepreneurs that can show a relative lack of sophistication or business acumen in a conversation until the topic of their business valuation comes up. Once it gets to that point, they can rattle off every Andreesen Horowitz deal and how “X” business was acquired at 10x revenue.

For whatever reason, the math always seems to magically work out to a pre-money valuation of around $100 million. Indeed, there are numerous expansion (and some early stage) software companies that have raised outside capital at $100mm+ valuations, but I thought it made sense to share my (and many investors) thought process on valuation.

First, it’s important to note that in most other areas of investing, businesses are valued off of some proxy for cash flow (EBITDA, EBIT, etc). I point this out because I think some people lose sense of the fact that valuing a business as a multiple of revenue is, to begin with, generous.

It should also be noted that valuation is more art than science, or perhaps a more appropriate statement is that valuing a business is art rooted in science. Very simply, I like to take an average of a basket of publicly traded company EV/Revenue multiples, then apply a 25-50% illiquid discount and start there. On top of this, I’ll look at the revenue components and value each of those individually to get a sum of the parts total valuation.

So, for example, if a SaaS business is doing $15mm in total revenues, but $10mm of that is recurring subscription revenue, $2.5mm is professional services, and $2.5mm is maintenance, I might say that recurring part of the revenue stream is valued at 3x revenue, the professional services component is valued at 1x revenue, and the maintenance component is valued at 1x revenue, yielding a total valuation of $35mm. On top of all that we may layer a further discount or premium based on perception of team, risk, market, etc.

The bottom line is that this is one iteration out of many for how a business can be valued and should help explain where a VC may start a valuation conversation for an expansion stage software company.

]]>http://blog.openviewpartners.com/sorry-but-your-expansion-stage-software-business-probably-aint-worth-100-million/feed/0Being a Dealmaker Means Believing Anything is Possiblehttp://blog.openviewpartners.com/be-a-dealmaker/?utm_source=rss&utm_medium=rss&utm_campaign=be-a-dealmaker
http://blog.openviewpartners.com/be-a-dealmaker/#commentsSat, 31 Dec 2011 15:00:56 +0000http://blog.openviewpartners.com/?p=13915In his book, The 4-Hour Work Week, I love the importance Tim Ferris places on being a “dealmaker” and his dealmaker manifesto: reality is negotiable. Unless you possess a hugely valuable technical ability, I believe that being a dealmaker and having the mentality that anything is possible (and the resolve to work your butt off to […]

In his book, The 4-Hour Work Week, I love the importance Tim Ferris places on being a “dealmaker” and his dealmaker manifesto: reality is negotiable. Unless you possess a hugely valuable technical ability, I believe that being a dealmaker and having the mentality that anything is possible (and the resolve to work your butt off to turn that “anything” into reality) is the single most important trait in business people who find success at an early age. I also think that organizations that empower employees to act as “principals” are generally more successful and have a happier and more productive work-force.

I wish more college students and recent college grads understood the power of this concept and the fact that you have to go out into the world and mix things up. I realize that younger people are less confident and think that they may not have a ton to offer, but the truth is that almost everyone is a subject matter expert in something. Have you ever come across any type of consumer product (a candy bar, a pair of jeans, an energy drink) and thought to yourself “wow this is incredible, why can’t I find this in my hometown”? The dealmaker in you should lob a thoughtful call or email into the company and offer to help distribute their product in your region. So what if you have no idea how to distribute a consumer food/beverage product? You can figure it out. Have you ever used a service/product that you thought you could improve? Get in touch with the provider of that service and recommend ways to improve it or start putting together your own business that provides a better, cheaper service!

Often, nothing will come of these activities, but I guarantee if you get yourself in the habit of thinking that you have something to offer and are in a position to do something about it, opportunities will begin to unfold.

]]>http://blog.openviewpartners.com/be-a-dealmaker/feed/0My Thoughts on "Networking"http://blog.openviewpartners.com/my-thoughts-on-networking/?utm_source=rss&utm_medium=rss&utm_campaign=my-thoughts-on-networking
http://blog.openviewpartners.com/my-thoughts-on-networking/#commentsSat, 31 Dec 2011 10:00:07 +0000http://blog.openviewpartners.com/?p=13898I absolutely hate the term “networking.” Growing up, I had never heard the term and certainly didn’t use it as a verb in my daily lexicon. When I was in college, someone recommended that I read Keith Ferazzi’s book, Never Eat Alone, which I dutifully read and remember thinking how disingenuous it made personal interactions […]

Growing up, I had never heard the term and certainly didn’t use it as a verb in my daily lexicon. When I was in college, someone recommended that I read Keith Ferazzi’s book, Never Eat Alone, which I dutifully read and remember thinking how disingenuous it made personal interactions seem. I think Keith’s intention was to write a book about how to be “genuine” in making connections and expanding your professional network, but I think it painted a different picture. Does everyone have an angle? Does everyone have a hidden (or not so hidden) agenda? Maybe, but I personally find nothing more unappealing than when someone says they are meeting someone or doing something to “network.” I hate the word, and by the way, I maintain that it’s not a verb, though Merriam-Webster would disagree with me.

I do agree with Keith’s sentiment that one should never “keep score,” but do think that people should take care to be sensitive to other people’s time, interests, and past help. In his book, Keith took umbrage when an acquaintance did not immediately fulfill Keith’s request to meet a major Hollywood executive whom the acquaintance knew (and seemingly did not know well). Though it’s my genuine desire to be helpful to just about everyone I come in contact with, I can understand not wanting to bother a new acquaintance (particularly a very busy one) with a third party’s request for an introduction. I don’t think of it as using up “equity” in the relationship, as Keith’s acquaintance puts it, but I do think of it as using up someone’s time. One comes across as pushy and disrespectful of another’s time in immediately trying to “harvest” a new business relationship for your own or someone else’s gain. Use common sense, be genuine, and be respectful of others’ time and feelings.

In my brief adult life, I have generally found success in reaching out to people that I am genuinely interested in meeting or talking to. Of course, I’m interested in meeting with certain people because I am looking for insight, guidance, mentorship, a specific business purpose, or sometimes plain curiosity. I’m always up-front with my intentions and generally have a pay-it forward attitude when people reach-out to me for similar purposes. I have a hunch that if people stopped thinking of “networking” as a calculated activity and started thinking of it as an opportunity to meet someone you can learn from or be helpful to, they might find more success and satisfaction.

]]>http://blog.openviewpartners.com/my-thoughts-on-networking/feed/0How to Present Your Business Opportunity to a VC on a Silver Platterhttp://blog.openviewpartners.com/how-to-present-your-business-opportunity-to-a-vc-on-a-silver-platter/?utm_source=rss&utm_medium=rss&utm_campaign=how-to-present-your-business-opportunity-to-a-vc-on-a-silver-platter
http://blog.openviewpartners.com/how-to-present-your-business-opportunity-to-a-vc-on-a-silver-platter/#commentsFri, 30 Dec 2011 14:00:24 +0000http://blog.openviewpartners.com/?p=14017Do you have a killer business that you’d really like to fund with venture capital? Do you want VCs to battle each other for an opportunity to give you money? Here’s what you can do to present the business opportunity opportunity on a silver platter: Paint a compelling growth story: It goes without saying, but […]

Do you have a killer business that you’d really like to fund with venture capital? Do you want VCs to battle each other for an opportunity to give you money? Here’s what you can do to present the business opportunity opportunity on a silver platter:

Paint a compelling growth story: It goes without saying, but what excites many VCs above all else is incredible revenue or operating margin growth.

Clearly articulate a large market size: VCs love to see a market size large enough to support your business. It becomes increasingly attractive if you’re able to further segment the market and define your projected market penetration.

Have market analysts and customer references ready: A VC will typically want to speak with several market analysts who are experts in your industry as well as current customers. If you have names and contact information available immediately, the investor can get to work immediately and with little friction

Define the competitive landscape: VCs will always want to understand exactly who your competition is, how crowded the market is, and what your competitive advantage/differentiation is. I have found that a simple grid highlighting the overlapping/non-overlapping features across all the companies in your space to be most helpful

Map out your exit: Professional investors evaluating an opportunity will typically want to understand potential exit scenarios. I have always found it helpful (and been appreciative) of entrepreneurs who spend time analyzing and articulating who likely acquirers may be, whether their research supports an IPO scenario, etc. It pays to be thoughtful with this exercise: If you suggest selling your business to publicly traded company X for $500mm but company X has $3 million of cash on its balance sheet and a market capitalization or $35 million, you’re not going to appear very smart

]]>http://blog.openviewpartners.com/how-to-present-your-business-opportunity-to-a-vc-on-a-silver-platter/feed/0Productivity Tips from a VC Neophytehttp://blog.openviewpartners.com/productivity-tips-from-a-vc-neophyte/?utm_source=rss&utm_medium=rss&utm_campaign=productivity-tips-from-a-vc-neophyte
http://blog.openviewpartners.com/productivity-tips-from-a-vc-neophyte/#commentsThu, 29 Dec 2011 10:44:04 +0000http://blog.openviewpartners.com/?p=13872Probably the hardest single aspect of my job as a venture capital neophyte is efficiently managing my time for the greatest productivity. Making great investment decisions is pretty hard too but as far as this post is concerned, we’re talking time management. I’m fairly certain time management is an issue for many people in many […]

Probably the hardest single aspect of my job as a venture capital neophyte is efficiently managing my time for the greatest productivity. Making great investment decisions is pretty hard too but as far as this post is concerned, we’re talking time management. I’m fairly certain time management is an issue for many people in many professions so I thought I’d outline my time management challenges, and how I attempt to overcome them.

OpenView is a small investment firm and as such, we run pretty lean and mean. My core job is to find great companies to bring into our portfolio, evaluate and execute investments once opportunities are sourced, and then support those investments once they are in the portfolio. Sounds pretty simple right? That’s what I thought…until I came on board and found out that its really difficult. Seriously fun, but very difficult. Why is it so difficult?

Each element of my job is multi-faceted and I can seldom focus on one discrete task for a long period of time. For example, any on any given I’ll have a number of phone calls with prospect companies, an in-person meeting, a post-LOI piece of financial analysis to produce, dozens of emails to respond to, a market research call with an industry expert, an interview with a prospective OpenView employee, and the list goes on.

So what do I do to keep myself on task and organized?

It may sound simple to some of you, but below is the “blocking and tackling” of what gets me through the week in a productive fashion:

Block Scheduling: I try to block my mornings (from 8:30am to noon) for calls/meetings with prospect companies. This way I always have a time reserved on my calendar for an activity that otherwise may get pushed to the back-burner when new items up pop-up during the week

Create a weekly “backlog”: Every Monday (or Sunday night) I create an excel sheet with the most important activities that I need to accomplish during the week ahead of me. I also add an estimation of time to completion for each task. I try not to have more than 35 hours of “scheduled” activities on my backlog as this last year has taught me that a) I generally underestimate how long it takes to get certain things done, and b) 35 hours seems to be the magic number when it comes to how much highly-focused work/work-product can be produced in a work-week. You might think that sounds like a small number for a hard-working VC, but if you consider your own week, I have a hunch that you do 35 hours or less of highly-focused activity.

Schedule time for email: Email is highly distracting. I get emails all day-long almost every day of the week. If responded to every email as I received it, I’d become even less efficient than I already am! As such, I try to schedule an hour every day, or several hours over the weekend (typically on Sunday night) to get my inbox as close to zero as possible.

These are just a few of the tactical things that I do to manage my own time and personal activities during the week. There are myriad books written on the topic but I have found that the above three tips have drastically improved my efficiency.

]]>http://blog.openviewpartners.com/productivity-tips-from-a-vc-neophyte/feed/0Don't Forget: VCs Are Sales People Trying to Make Moneyhttp://blog.openviewpartners.com/dont-forget-vcs-are-sales-people-trying-to-make-money/?utm_source=rss&utm_medium=rss&utm_campaign=dont-forget-vcs-are-sales-people-trying-to-make-money
http://blog.openviewpartners.com/dont-forget-vcs-are-sales-people-trying-to-make-money/#commentsWed, 14 Dec 2011 13:58:57 +0000http://blog.openviewpartners.com/?p=12489I am just arriving at the end of my first year working in venture capital and I’m thrilled to say that I love my job and love the people that I work with here at OpenView Venture Partners. This past year has gone by exceptionally fast, though I’m beginning to think that every year of […]

]]>I am just arriving at the end of my first year working in venture capital and I’m thrilled to say that I love my job and love the people that I work with here at OpenView Venture Partners. This past year has gone by exceptionally fast, though I’m beginning to think that every year of life goes by faster than the previous one! I have learned a lot and, and had the chance to interact with some incredible entrepreneurs, operators, and other investors. There is one aspect of venture capital, however, that continues to irk me so I thought I’d take a few minutes to vent. Here goes nothing:

Venture capitalists are sales people. We sell money.

The reason we sell money is to make more money. Our investors, aka our Limited Partners, have given us money for the expressed and sole purpose of attempting to return more capital to them than they initially gave us. That’s the business in an overly simplistic nutshell. Am I demented to boil it down so simply? Am I a greedy capitalist trying to suck the money marrow out of the bones of unsuspecting entrepreneurs. I don’t think so.

Why is it then, that entrepreneurs seldom hear VCs talk about making money? Why are Venture Capitalists, in some circles, held up as experts of everything and maverick business people who defied the odds to achieve great success? I have a few ideas…

Let me first clarify something: Venture capitalists are indeed trying to make money, but that said, most of us have chosen this path because we have a genuine passion for building businesses, entrepreneurship, technology (or whatever it is that we invest in), and do in fact have a bit of a renegade streak in us. Many VCs likely had opportunities to make more money in the near-term elsewhere with far less risk. That said, a key part of our long-term goal is to earn our LPs (and ourselves) a significantly above-average amount of money. We’ll make money by investing in promising businesses /entrepreneurs and doing everything in our power to make the people and businesses we invest in successful. This is all pretty obvious but I felt the need to put this down in writing after hearing numerous stories from entrepreneurs (and investors) that VCs aren’t in this for the money. While that may be true on a personal level for some people, it’s absolutely not true at an institutional level, or at least I haven’t met an LP that’s investing in venture capital in hopes of losing money.

Why do I say that we sell money?

Often, a great business or entrepreneur that is seeking to raise outside capital will have a lot of interest from a number of different venture capital funds. We’re all offering generally the same proposition: money in exchange for ownership of a piece of a business. Last time I checked, my ten bucks is the exact same as the next guy’s and entrepreneurs generally would rather not take money from an investor that views them simply as a mechanism to provide a great return to limited partners. So what do we do? We VCs brand ourselves, work to differentiate our model, and try to represent our firms as the most attractive partners. For many this does not involve highlighting a VC’s desire or mission to make money. In order for us to be great at our jobs we need to be able to invest in great businesses, and much of that has to do with our ability to convince great entrepreneurs to take our money over someone else’s.

There’s nothing wrong or nefarious with this business, but I think VCs in particular need to remember — and perhaps be a bit more upfront about — why we do what we do.

]]>http://blog.openviewpartners.com/dont-forget-vcs-are-sales-people-trying-to-make-money/feed/0How Venture Capital Deals Fall Aparthttp://blog.openviewpartners.com/how-deals-fall-apart/?utm_source=rss&utm_medium=rss&utm_campaign=how-deals-fall-apart
http://blog.openviewpartners.com/how-deals-fall-apart/#commentsTue, 06 Dec 2011 22:18:04 +0000http://blog.openviewpartners.com/?p=11383Over the last year, I have found that entrepreneurs contemplating taking on expansion stage venture capital are almost universally concerned with the certainty of deal consummation after signing a term sheet. Here at OpenView, we aim to fund 100% of the companies with which we sign term sheets and complete our due diligence, but occasionally, […]

Over the last year, I have found that entrepreneurs contemplating taking on expansion stage venture capital are almost universally concerned with the certainty of deal consummation after signing a term sheet. Here at OpenView, we aim to fund 100% of the companies with which we sign term sheets and complete our due diligence, but occasionally, we’ll discover something over the course of diligence that prevents us from continuing down the funding path. Several months ago, my colleague Firas Raouf opined on how to avoid getting yourself into a busted venture capital deal, so I thought I’d get a bit more specific and lay out the key components of how deals fall apart.

Revenues/Bookings are not as advertised

Occasionally, we will find that company management will either intentionally or unintentionally misrepresent the current financial state of the business. There is not much that we can do to mitigate the intentional or nefarious misrepresentation of revenues/booking information. I suppose people do this in the hopes that an investor won’t figure it out, but the odds of that are extremely low. All it does is waste a huge amount of time for both investors and company management alike and take both parties away from otherwise productive activities. Intentionally misrepresenting financial information is rather unscrupulous and leaves a really bad taste in everyone’s mouth.

Unintentional misrepresentation of financials is easier to understand but should also be avoided. This can occur when investor and management have differing definitions of what bookings are so it’s best to establish that definition at the beginning of the discussion. For example, I may think that bookings means contractually obligated revenue for a period of time and that both parties have signed said contract. You may think that bookings is defined as a verbal agreement with a contract to be signed at a future date. These are subtle differences but can have a huge impact on the way we evaluate a business. Another possibility is that deals that you had anticipated closing at the commencement of your discussion with an investor (and that you had included in your quarterly or yearly revenue numbers) end up falling through. This happens quite regularly and depending on the significance of deviation, perhaps can be worked through with your investor. I think a good rule of thumb is to be conservative with your revenue/bookings representations and to be up-front in saying that a deal has not yet officially closed etc.

Company drastically misses its numbers

This is touched on above but in case its not abundantly clear, if a company is projecting doing $X million in revenues during the quarter that we’re conducting diligence and they end up doing $0.5X, the deal can fall apart quickly. As “growth” investors, we are looking for sustained growth and a significantly “down” quarter would certainly give us pause. That being said, timing may be an issue and the revenue will simply be recognized a quarter later. We will certainly work to understand exactly what has happened and make the sensible and prudent decision.

Previously unknown litigation/legal matters

It’s best to make any current litigation, legal infractions, IRS investigations, etc. known upfront as again, the investors will always find out about them. Let us know at the on-set so we can evaluate the situation and determine if it makes sense to go forward.

Failure to release product in certain timeframe

If a company is advertising a significant product release and fails to release it in the timeframe contemplated, that is another worrisome development. That product release was likely factored into the company’s financial projections and our assessment/interest in the business. A failed product release could lead to weaker-than-anticipated financial performance.

Generally, investors will have a decent sense of the market opportunity, sales pipeline, and customer satisfaction/opportunity prior to signing a term sheet. It is possible, however, that a company’s management has either misrepresented certain aspects of the opportunity or does not want to share certain pieces of information prior to signing a term sheet.

For example, if a company fails to introduce us to customers prior to signing a term sheet and then after signing we find out that numerous customers have serious issues with the company’s product or services, that will throw a serious wrinkle into the deal process. This can be mitigated by both providing customer introductions prior to signing a term sheet as well as relaying any key issues that customers may have had to the investor. I have also encountered situations in which a company will accurately represent its revenue/booking information, but have totally misrepresented its qualified sales pipeline. Like bookings, it’s best to ensure that both investor and company are aligned in their understanding of what “qualified sales pipeline” really means.

Bad management reference calls

As part of our standard due-diligence process, OpenView typically conducts reference calls for members of the senior management team (CEO, CFO, VP of Sales, VP of Engineering, etc.). It’s possible that something unpleasant would surface during the course of these calls. For example, if the CEO of a company has universally poor references from the references he provided, that would signal a few things: 1) The CEO isn’t the sharpest tool in the shed if he provided references that would unanimously ding him, and 2) There are probably significant issues with the CEO if numerous past employers, partners, and employees fail to paint a positive picture.

Hopefully this helps give further insight into why deals fall apart. These are by no means strict rules that investors live by (well perhaps some do) but more a compilation of elements that I have seen or heard of breaking apart deals. The bottom line is that transparency by both investor and company alike provides the best chance for a closed deal.